medium · Private Credit documentation-covenants-terms
An institutional lender is reviewing a 'covenant-lite' Term Loan B. Which of the following best describes the structural risk associated with incurrence covenants compared to maintenance covenants?
- Default occurs automatically and immediately if the interest coverage ratio falls below 2.0x in any fiscal quarter, per the credit agreement.
- Incurrence covenants actually provide an earlier warning signal to lenders by requiring monthly compliance certificates from management.
- The borrower must contractually maintain a specific minimum equity cushion at all times, regardless of EBITDA performance.
- Lenders cannot trigger a default based on deteriorating financial ratios alone if the borrower avoids specific restricted actions.
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